The 5 Best Providers of Bad-Credit Auto Financing
If you have bad credit, you can expect to encounter some challenges when it comes to getting an auto loan. Depending on your credit score and income, however, you may be able to find a lender willing to work with you.
In some cases, you can improve your chances of getting a car loan by having a co-signer. Regardless, it's important to shop around and do your research to make sure you're getting a decent deal.
Best Companies for Bad Credit Auto Financing
Bad credit doesn't have to stop you from buying a car. If your score is poor, however, you'll probably need to do some searching before you find loan terms you can live with.
Keep in mind that most auto loans last for at least a few years. You don't want to get stuck with a high interest rate that makes it hard to stay on top of your payments.
Fortunately, there are reputable lenders out there that work with borrowers from all financial backgrounds. If you have bad credit and need a car loan, here are five lenders to consider.
To get a loan through RoadLoans, any prior bankruptcy must be discharged, which means the case has been closed and the borrower is no longer required to pay any debts related to the bankruptcy.
RoadLoans is a direct-to-consumer lender owned by Santander Consumer USA, a consumer finance company that specializes in vehicle financing. It offers both new and used car loans, as well as auto refinancing.
On the downside, RoadLoans only does business within its network of approved car dealers. While RoadLoans works with 14,000 dealerships around the country, it doesn't offer loans to borrowers in Alaska, Hawaii, New Hampshire, Mississippi, or Nevada.
To finance a car through RoadLoans, you must borrow at least $5,000, and your loan can't exceed $75,000. RoadLoans also allows you to borrow with a co-signer, which can improve your chances of getting a loan.
Autopay is a loan aggregator, which means it takes a borrower's financial information and uses it to match the borrower with a variety of banks and credit unions willing to offer an auto loan. The lenders in the Autopay network provide loan amounts ranging from $2,500 to $100,000 and repayment terms between 24 months and 84 months.
One of the upsides of using Autopay is that it only does a soft pull of your credit when you apply to get matched with lenders. This allows you to see all the offers available to you before proceeding with a loan application.
Once you move forward with an application, the individual lender will do a hard pull of your credit. This can affect your credit score, so it's best to avoid submitting too many applications unless you're certain about pursuing a loan.
Unlike a lot of other auto lenders, Autopay offers lease buyouts as well as refinancing. If you're stuck with a high-interest car loan, Autopay claims its customers save an average $1,000 each year and see a 50% drop in annual percentage rate (APR) by refinancing.
However, this kind of savings is probably only available to borrowers with good credit scores. To see what kind of rates you're eligible for, you'll need to prequalify online.
Autopay allows co-signers, which can help borrowers get a more favorable interest rate. There is also no fee to apply, and Autopay loans have no prepayment penalties, so you can pay off your loan early to save on interest.
3. Capital One
Capital One is a recognizable name, which can be a comfort when you're applying for car loans and unsure where to begin your search. Capital One also allows potential borrowers to prequalify without incurring a hard pull on their credit report.
Like many other auto loan lenders, Capital One works with select dealerships. With 12,000 dealers in its network, however, there's a good chance of finding one near you.
To finance a car through Capital One, your vehicle must be under 10 years old and have fewer than 120,000 miles on the odometer. Capital One also limits its auto financing to vehicles intended for personal use — no commercial vehicles allowed.
If you prefer to do your car shopping online, you can use Capital One's Auto Navigator tool. This lets you find a car available from a dealership that offers Capital One financing.
Once you've found a car on the Auto Navigator system, you can prequalify for a loan for that specific vehicle. This allows you to visit the dealership with a prequalification letter in hand.
To use the Auto Navigator tool, you must be at least 18 years old and earn a minimum of $1,500 or $1,800 per month depending on your creditworthiness. Unfortunately, the Auto Navigator tool isn't available for borrowers who live in Alaska or Hawaii.
Capital One offers both new and used car loans, as well as refinancing of existing auto loans. Borrowers can finance a minimum of $4,000, with maximum loan amounts dependent on the individual borrower's creditworthiness and the type of car they're financing.
Perhaps best known for its innovative car vending machines, Carvana also offers used car loans to people with a broad range of credit scores. The main drawback with Carvana, however, is that it only offers used vehicles and it only finances cars from its own inventory.
If you're okay with restricting your search to Carvana's offerings, however, you can prequalify before you buy. This gives you a chance to get an idea of what kinds of terms and interest rate you're looking at without worrying about a hard pull on your credit.
To finance a car through Carvana, you must be at least 18 years old and earn a minimum of $4,000 per year. While Carvana might work with you if you have a discharged bankruptcy on your credit profile, you can't have any active bankruptcies.
On the downside, Carvana doesn't allow co-signers, which can limit your options if you need a co-applicant to qualify. Carvana also requires a down payment or a trade-in.
If you qualify for a loan through Carvana, you can pay it back between 36 and 72 months depending on your creditworthiness. In addition to its car vending machines, Carvana also offers a seven-day money-back guarantee and delivery of your vehicle to your door.
5. New Roads
New Roads offers direct loans with no down payment required for borrowers who qualify. According to its company website, New Roads specializes in borrowers with bad credit and will work with people even if they have a bankruptcy, past repossession, late payments, charge-offs, or tax liens.
New Roads offers loans in 30 states. The company finances new and used car loans, as well as leases and refinance loans.
While New Roads doesn't state a minimum credit score required to apply for a loan, the company will check your credit when you submit an application. It will also look at other factors, such as your income, length of employment, and how long you've lived at your current residence.
There may be some exceptions, but New Roads typically won't finance a car that's more than 11 years old or has in excess of 150,000 miles. On the plus side, New Roads allows co-signers, which can help borrowers get a lower interest rate and better loan terms.
Is It Better to Finance a Car Through a Bank or Dealership?
Both bank and dealership finances have their pros and cons. If you have bad credit, it's best to examine each form of financing closely before ruling anything out.
Pros and Cons of Dealership Financing
Dealership financing offers a few different advantages. First, there's the convenience factor to consider.
When you're already on the lot, you can work with the dealership's finance office in person, which makes it easy to negotiate. Individual dealerships may also offer various incentives to get you to sign a deal with them.
Many dealerships also partner with more than one bank or credit union, which means they can offer terms from a variety of lenders. This gives you an opportunity to comparison shop without doing the legwork yourself.
On the other hand, dealership financing can come with drawbacks. Most dealerships act as middlemen for auto loan financing, which means they receive a commission from the bank every time they arrange a loan.
This commission gets tacked onto your loan, which can leave you paying more than you would if you obtained financing on your own.
While most dealerships don't finance vehicles directly, some dealerships that work with people with bad credit scores offer on-site financing.
These dealerships often advertise as buy-here, pay-here auto dealers, as they offer a one stop shop for both buying and financing a car. While this can be convenient, these dealerships charge the highest interest rates in the industry, so it's important to do your homework before signing on with one.
Pros and Cons of Bank Financing
Bank financing also comes with advantages and disadvantages. On the upside, working with a bank where you have an existing relationship might mean scoring a lower interest rate or a better deal, as the bank wants to keep you happy as a customer.
Additionally, going straight to the bank means the dealership doesn't get a cut of the deal. With no middleman taking a commission, you can often get better terms when you finance directly with a bank or credit union.
Perhaps the biggest downside of going with bank financing is the possibility of missing out on incentives only car dealerships offer. If you finance your loan through a dealership, you can sometimes get 0% APR or a very low interest rate as long as you have a down payment or a trade-in.
By contrast, banks and credit unions are much less likely to offer these types of deals. Shopping for an auto loan with banks also means doing all the research and footwork yourself, as you won't have a dealer gathering loan offers on your behalf.
How Does Having a Bad Credit Score Impact an Auto Loan?
As automakers continue to load cars with new safety features and accessories, the price tag of a new vehicle keeps creeping up. As of December 2018, the average price of a new car was $37,577.
This means that consumers are left financing increasingly expensive vehicles. To afford a new car, many people are forced to stretch an auto loan out over four or five years — making for a more affordable monthly payment but a much higher amount of interest paid over the life of the loan.
Auto lenders assess a borrower based on the level of risk the person poses to the lender. When the bank or credit union evaluates a potential borrower, it wants to know whether it can count on the person to repay their loan.
One of the main ways lenders evaluate this risk is by looking at a borrower's credit score and credit history. If the person has a bad score, there's a greater chance of them making late car payments or defaulting on their auto loan altogether.
To mitigate this risk, lenders charge borrowers with bad credit higher interest rates. They also tend to put strict caps on how much money they're willing to loan a borrower with less than perfect credit.
These factors mean that borrowers with bad credit end up paying more for a car loan compared to people with good credit.
Do I Need a Down Payment or Trade In?
Even with bad credit, you might find lenders that don't require a down payment or a trade-in. However, you'll typically save money on your loan if you can come up with a down payment or offer a trade-in.
This is because a down payment or trade-in improves your loan-to-value ratio, which is the total amount you're borrowing compared to the value of the item — in this case a car — that secures the loan.
With an auto loan, the vehicle you're financing acts as collateral to secure the loan. If you stop making payments and default on the loan, the lender can take back the vehicle, thereby reducing its risk.
When lenders give someone an auto loan, they generally avoid letting the person borrow more than the value of the car being financed — something known as being "upside down" or "underwater" on a loan.
If a borrower owes more than the car is worth, this means they have negative equity in the car, which increases risk for the lender. In a negative equity situation, the lender won't be able to recoup its losses by taking back the car and reselling it to pay off the loan.
This is where having a down payment or a trade-in can help. When you can put a lump sum of money toward the purchase of the car, you don't have to borrow as much, thereby lowering your loan-to-value ratio.
You can calculate your loan-to-value ratio by dividing the amount you're prequalified to borrow by the value of the vehicle you want to buy. For example, if you're buying a car valued at $30,000 and you're approved for a $25,000 loan (with a $5,000 trade-in), your loan-to-value ratio is 0.83 or 83%.
Generally, lenders view a higher loan-to-value ratio as a greater risk. As a result, they may be less likely to offer you a loan.
You can reduce this risk and make yourself more attractive to lenders by making a down payment or offering a trade-in.
Do I Need A Cosigner If I Have Bad Credit?
Another way to reduce how risky you appear to lenders is by having a co-signer. If you can't afford a down payment and you don't have a trade-in to offer, a co-signer can be a good way to get an auto loan with bad credit.
If you want to go the co-signer route, it's best to pick someone with an excellent credit score. This is because people with good scores are more likely to be approved for a loan, and they typically get better interest rates.
By adding a co-signer to your auto loan, you can piggyback on their good credit, since the lender will take the co-signer's credit score into consideration when determining what kind of interest rate to offer you. This can be a good option if you need a car right away and don't have time to work on improving your credit score.
The downside of having a co-signer, however, is that they become responsible for the balance of the loan if you stop making payments. They have just as much liability for the loan as you do, except they don't get the benefit of driving a new car.
In this way, a co-signer assumes all of the risk without enjoying any of the perks. This is why it's important to be absolutely certain you can afford your car payment before asking someone to act as a co-signer.
If you dislike the idea of putting that sort of responsibility on someone else, one strategy is to take out an auto loan with a co-signer and then work to improve your credit score so you can refinance later. When you refinance, you can pay off the original loan and remove the co-signer.
Bad Credit Auto Financing FAQs
The following are some of the most commonly asked questions and answers regarding bad credit auto financing.
Can I Get a Car Loan with a 500 Credit Score?
Most lenders don't set hard limits on what kind of credit scores they're willing to accept. Instead, they look at a range of factors, including a borrower's credit score, income, employment history, and sometimes even things like how long the person has moved in the last few years.
This lack of a definite limit can be frustrating when you're shopping for an auto loan. If you have bad credit, you want to avoid wasting time if a lender won't even consider you for a loan.
On the other hand, there are plenty of lenders that specialize in auto loan financing for people with bad credit. Because these lenders make it a point to work with people with less than perfect credit, these lenders are worth checking out if your credit score is 500.
Additionally, you can try buy-here, pay-here dealerships that offer in-house financing. Because these loans often come with very high interest rates, however, it's important to shop around and compare and contrast rates and terms from several different lenders before you commit.
Also keep in mind that many lenders have online tools that let you prequalify for an auto loan before you shop for a car. While a prequalification isn't the same thing as an approval, it can give you an idea of your chances of getting a loan with a 500 credit score.
Being prequalified can also put you in a much stronger negotiating position when you visit dealerships.
What Is the Lowest Credit Score to Buy a Car?
Unfortunately, it's impossible to definitively identify the lowest possible credit score for getting an auto loan. While lenders may have some kind of internal cutoff for minimum scores, they generally don't make this information public knowledge.
As a borrower, this can make you feel like you're left guessing. However, you can probably still find a lender willing to work with you despite your low score.
According to Experian, which is one of the three major credit bureaus, a FICO score that falls anywhere between 300 and 500 is considered deep subprime for lending purposes. This means that people with credit scores in this range will receive the highest interest rates on a car loan.
When Experian analyzed the automotive finance market in 2019, it found that subprime borrowers received 19% of the auto loans for that year. By contrast, super prime (781-850) and prime (661-780) borrowers accounted for 63% of all borrowers in the auto loan industry.
This data shows that borrowers with the worst credit scores receive a smaller percentage of auto loans. On the other hand, they still get loans.
If your score falls in the subprime range, that doesn't necessarily mean you can't get a loan. You can improve your chances of getting approved by asking someone to co-sign or by coming up with a larger down payment.
What’s the APR for Bad Credit?
Because lenders set interest rates based on a number of factors, APR is different from borrower to borrower. However, you can get an idea of what you might pay based on the average rate people with your credit score have paid in the past.
In its report detailing the state of the auto loan market, Experian stated that borrowers with credit scores in the subprime range between 300 and 500 paid an average APR of 14.70% for a new car and 20.09% for a used car.
By contrast, borrowers with the highest credit scores paid an average APR of 4.23% for a new car loan and 4.77% for a used car loan. The disparity in APR between borrowers with bad credit and those with excellent credit shows why it's important to do whatever you can to improve your credit score before applying for car loans.
A bad credit score doesn't always mean you're out of luck when it comes to qualifying for a car loan, but it's important to shop around for fair terms and rates. You might also improve your chances of getting an auto loan by asking someone with good credit to act as a co-signer.
About the Author
Mike is a recognized credit expert and founder of Credit Takeoff. His credit advice has been featured in CNBC, Investopedia, CreditCards.com, Bankrate, Huffpost, The Simple Dollar, Reader's Digest, LendingTree, and Quickbooks. Read more.